Lowen Corp. v. United States

Citations: 785 F. Supp. 913; 69 A.F.T.R.2d (RIA) 894; 1992 U.S. Dist. LEXIS 2867; 1992 WL 39848Docket: Civ. A. 90-1589-B, 90-1588-B

Court: District Court, D. Kansas; February 25, 1992; Federal District Court

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The case involves Lowen Corporation and Eastern Investment Corp. as plaintiffs against the United States regarding employment tax liabilities for salespersons. The United States filed motions for partial summary judgment on two issues: (1) the entitlement of plaintiffs to relief under Section 530 of the Revenue Act of 1978 for their sign and decal salespersons, and (2) the classification of decal salespersons as employees or independent contractors for tax purposes. The parties agreed that summary judgment is appropriate for issue (1) concerning both types of salespersons and for issue (2) regarding decal salespersons. However, the government acknowledged that summary judgment is not suitable for issue (2) concerning sign salespersons.

Factually, the plaintiffs previously treated decal salespersons as employees before July 1984 but reclassified all salespersons as independent contractors after a corporate reorganization. An IRS audit concluded that all salespersons were employees from January 1, 1984, to December 31, 1986, leading to federal employment tax assessments against the plaintiffs. The plaintiffs paid withholding tax on one employee and sought refunds through litigation.

The plaintiffs claim protection under Section 530(a)(1) of the Revenue Act, which provides a 'safe harbor' from federal employment tax consequences for individuals not treated as employees if certain conditions are met. They concede that this provision does not apply to decal salespersons since they were treated as employees prior to 1984. The government counters that the plaintiffs cannot use the 'safe harbor' due to disallowance provisions in Section 530(a)(3), which states that if a taxpayer has previously treated individuals in similar positions as employees, the safe harbor does not apply for any subsequent periods.

The key issue for summary judgment is whether the taxpayers' sign sales representatives, previously treated as employees before July 1, 1984, held "substantially similar positions" under Section 530 compared to those not treated as employees. Summary judgment is warranted when there is no genuine issue of material fact, allowing the moving party to prevail as a matter of law. The deposition of Dennis Johnson, the taxpayers' sales manager, reveals that the primary difference between the two categories of salespersons is that salaried employees completed daily call reports and had different compensation structures. These distinctions are deemed insignificant, as the salespersons performed similar work, traveled in their territories, provided their own transportation, had sales goals, and reported to Johnson, who could terminate underperforming salespersons. Consequently, since the taxpayers treated some salespersons as employees, they cannot invoke the "safe harbor" provisions of Section 530(a)(1) for any salespersons, leading to the granting of the government's motion for partial summary judgment.

Regarding the classification of decal salespersons, prior to 1984, all were treated as employees for tax purposes. The taxpayers attempted to reclassify them in 1984 through an "Independent Representative Agreement," replacing the previous "Employment Agreement." The crux of the issue is whether this reclassification effectively changed their status from employees to independent contractors, determined by the degree of employer control over work performance. A comparison of the two agreements shows they are largely similar, with the main change being that salespersons became responsible for their own expenses and no longer received a salary. It is undisputed that prior to July 1984, decal salespersons received a salary, expense reimbursement, health insurance, and commissions; after that date, their compensation included what they previously received plus commissions.

The compensation package change was deemed cosmetic, and the modification regarding daily call reports, shifting from a requirement to a request post-July 1984, was considered de minimis, resulting in no material factual disputes. The core issue revolves around the responsibilities of the decal salespersons, overseen by Glenna Cooley, the national sales director. Cooley's duties included directing the sales force, recruitment, training, enforcing sales territories, and direct supervision in the field, indicating significant control by the plaintiffs. Her deposition corroborated the written duties, although two salespersons' affidavits contest her testimony, one being the owner's daughter. The court, while recognizing the insufficiency of the affidavits for summary judgment on independent contractor issues, opts to deny summary judgment at this stage but may reconsider later. The government’s motion for summary judgment on Section 530 is granted, while the motion regarding the independent contractor-employee classification is denied pending future evaluation.